FILED: NEW YORK COUNTY CLERK 03/26/2010 INDEX NO /2009 NYSCEF DOC. NO. 20 RECEIVED NYSCEF: 03/26/2010

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1 FILED: NEW YORK COUNTY CLERK 03/26/2010 INDEX NO /2009 NYSCEF DOC. NO. 20 RECEIVED NYSCEF: 03/26/2010 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK MBIA INSURANCE CORPORATION, Index No /09 Plaintiff, -against- CREDIT SUISSE SECURITIES (USA) LLC, DLJ MORTGAGE CAPITAL, INC., and SELECT PORTFOLIO SERVICING, INC., Defendants. DEFENDANTS CREDIT SUISSE SECURITIES (USA) LLC, DLJ MORTGAGE CAPITAL, INC., AND SELECT PORTFOLIO SERVICING, INC. S REPLY MEMORANDUM IN SUPPORT OF DEFENDANTS MOTION TO DISMISS THE COMPLAINT Barry S. Levin (admitted pro hac vice) Darren S. Teshima (admitted pro hac vice) Sarah C. Marriott (admitted pro hac vice) ORRICK, HERRINGTON & SUTCLIFFE LLP The Orrick Building 405 Howard Street San Francisco, CA Tel: (415) Fax: (415) Stan Chelney ORRICK, HERRINGTON & SUTCLIFFE LLP 666 Fifth Avenue New York, NY Tel: (212) Fax: (212) Attorneys for Defendants Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital, Inc. and Select Portfolio Servicing, Inc.

2 TABLE OF CONTENTS Page I. INTRODUCTION... 1 II. ARGUMENT... 2 A. MBIA s Fraudulent Inducement Claim Should Be Dismissed Because MBIA Cannot Adequately Plead Justifiable Reliance MBIA s Failure to Do Any Independent Due Diligence Dooms Its Fraudulent Inducement Claim Neither the Presence of Contractual Warranties Nor Plaintiff s Ready Access to Information Disproving Defendant s Representations is Relevant to the Issue of Due Diligence MBIA Received Disclosures that Alerted It to the Underwriting Concerns It Now Raises No Fact Issue Precludes Dismissal Because MBIA s Own Allegations Defeat Any Claim of Justifiable Reliance... 8 B. MBIA s Fraudulent Inducement and Contract Claims Are Duplicative... 9 C. MBIA s Contract Causes of Action 2 and 5 Are Improperly Pleaded D. MBIA s Good Faith and Fair Dealing Claim is Duplicative of Its Contract Claims and Should be Dismissed E. MBIA Is Not Entitled to Punitive and Consequential Damages F. MBIA Is Not Entitled to a Jury Trial III. CONCLUSION i-

3 TABLE OF AUTHORITIES STATE CASES Page Abrahami v. UPC Constr. Co., 224 A.D.2d 231, 638 N.Y.S.2d 11 (App. Div. 1st Dep t 1996)...3, 5, 6 Bi-Economy Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127, 10 N.Y.3d 187, 856 N.Y.S.2d 505 (2008)...14 Big Apple Consulting USA, Inc. v. Belmont Partners, LLC, 2008 WL , 873 N.Y.S.2d 232 (Sup. Ct. N.Y. Sept. 15, 2008)...3, 5 Canstar v. J.A. Jones Constr. Co., 212 A.D.2d 452, 622 N.Y.S.2d 730 (App. Div. 1st Dep t 1995)...11 Curran, Cooney, Penney, Inc. v. Young & Koomans, Inc., 183 A.D.2d 742, 583 N.Y.S.2d 478 (App. Div. 2d Dep t 1992)...5 DDJ Mgmt., LLC v. Rhone Group, LLC, 60 A.D.3d 421, 875 N.Y.S.2d 17 (App. Div. 1st Dep t 2009)...1, 3, 5, 6 Matter of Dean Witter Managed Futures Ltd. P ship, 282 A.D.2d 271 (App. Div. 1st Dep t 2001)...8 Elghanian v. Harvey, 249 A.D.2d 206, 671 N.Y.S.2d 266 (App. Div. 1st Dep t 1998)...8 Fay s Drug Co. v. P&C Property Coop., Inc., 51 A.D.2d 887, 380 N.Y.S.2d 398 (App. Div. 4th Dep t 1976)...15 First Bank of the Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 690 N.Y.S.2d 17 (App. Div. 1st Dep t 1999)...12 Ittleson v. Lombardi, 193 A.D.2d 374, 596 N.Y.S.2d 817 (App. Div. 1st Dep t 1993)...8 J.E. Morgan Knitting Mills, Inc. v. Reeves Bros., Inc., 243 A.D.2d 422, 663 N.Y.S.2d 211 (App. Div. 1st Dep t 1997)...9, 12 KNK Enters., Inc. v. Harriman Enters., Inc., 33 A.D.3d 872, 824 N.Y.S.2d 307 (App. Div. 2d Dep t 2006)...3, 6 -ii-

4 TABLE OF AUTHORITIES (continued) Page Kimi Jewelers, Inc. v. Advance Burglar Alarm Sys., Inc., 161 A.D.2d 273, 555 N.Y.S.2d 51 (App. Div. 1st Dep t 1990)...15 Leav v. Weitzner, 268 A.D. 466, 51 N.Y.S.2d 775 (App. Div. 1st Dep t 1944)...15 Levi v. Utica First Ins. Co., 12 A.D.3d 256, 786 N.Y.S.2d 3 (App. Div. 1st Dep t 2004)...13 People v. Ferraro, 541 N.Y.S.2d 324, 143 Misc.2d 482 (Sup. Ct. 1989)...11 Pludeman v. N. Leasing Sys., Inc., 40 A.D.3d 366, 837 N.Y.S.2d 10 (App. Div. 1st Dep t 2007)...13 Rather v. CBS Corp., 68 A.D.3d 49, 886 N.Y.S.2d 121 (App. Div. 1st Dep t 2009)...13 Rocanova v. Equitable Life Assurance Soc y of U.S., 83 N.Y.2d 603, 634 N.E.2d 940 (1994)...14 Savasta and Co. v. Interactive Planet Software Motion Inc., 2008 WL , No (N.Y. Sup. Ct. June 12, 2008)...10 Swerskey v. Dreyer & Traub, 219 A.D.2d 321, 643 N.Y.S.2d 33 (App. Div. 1st Dep t 1996)...7 The Hawthorne Group, LLC v. RRE Ventures, 7 A.D.3d 320, 776 N.Y.S.2d 273 (App. Div. 1st Dep t 2004)...9, 11 UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 733 N.Y.S.2d 385 (App. Div. 1st Dep t 2001)...2, 8 Varo, Inc. v. Alvis PLC, 261 A.D.2d 262, 691 N.Y.S.2d 51 (App. Div. 1st Dep t 1999)...12 Wells Fargo Bank v. Stargate Films, Inc., 18 A.D.3d 264, 795 N.Y.S.2d 18 (App. Div. 1st Dep t 2005)...14, 15 Williams v. AGK Commnc ns, Inc., 542 N.Y.S.2d 122, 143 Misc.2d 845 (Sup. Ct. 1989) iii-

5 TABLE OF AUTHORITIES (continued) Page Zanett Lombardier, Ltd. v. Maslow, 29 A.D.3d 495, 815 N.Y.S.2d 547 (App. Div. 1st Dep t 2006)...4 FEDERAL CASES Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007)...5 Metropolitan Coal Co. v. Howard, 155 F.2d 780 (1946)...5 United Guaranty Mortgage Indemnity Co. v. Countrywide Financial Corp., 660 F. Supp. 2d 1163 (C.D. Cal. 2009)...5, 11, 13 Waltree Ltd. v. ING Furman Selz LLC, 97 F. Supp. 2d 464 (S.D.N.Y. 2000)...14 DOCKETED CASES MBIA Ins. Co., LLC v. Residential Funding Co. LLC, No /2008 (N.Y. Sup. Ct. N.Y. County Dec. 22, 2009)...10, 11, 13 MBIA Ins. Corp. v. Countrywide Home Loans, No /2008 (N.Y. Sup. Ct. N.Y. County Jul. 8, 2009)...10, 11, 13 STATE STATUTES N.Y. Statutes Law 72(b) cmt. (McKinney 2009) iv-

6 I. INTRODUCTION Based on (i) the allegations contained in MBIA s Complaint, which are accepted as true for purposes of this motion to dismiss; and (ii) the admissions made by MBIA in its opposition to the motion, it is undisputed that: MBIA conducted no independent due diligence prior to issuing the Policy that is, it chose not to open a single loan file to verify any of the summary information provided about the loans at issue; Credit Suisse had no unique access to information about the loans, which were originated by third-party financial institutions. Whatever there was to know about the loans was contained in the individual loans files, which MBIA does not dispute were available upon request; and Because all of the loan information was readily available, had MBIA reviewed even a small sample of loan files, it would have had the information it now claims was undisclosed. MBIA admits that its fraudulent inducement claim is based entirely on its post-loss review of the very same files it chose not to review prior to issuing the Policy. Regardless of the above, in light of information indisputably disclosed to MBIA about the relevant underwriting guidelines, including the fact that many of the loans were underwritten without any verification of income or assets, as a matter of law, MBIA could not have justifiably relied on any representation or warranty to avoid its obligation to conduct due diligence. MBIA s entire argument comes down to the claim that the existence of a representation or warranty as to the quality of the loans excuses a sophisticated party of its obligation to conduct due diligence. No case stands for that proposition, and controlling New York authority is to the contrary. E.g., DDJ Mgmt., LLC v. Rhone Group, LLC, 60 A.D.3d 421, 424, 875 N.Y.S.2d 17, (App. Div. 1st Dep t 2009), leave to appeal granted by 918 N.E.2d 963, 13 N.Y.3d 710, 890 N.Y.S.2d 448 (2009). MBIA has an express contractual remedy for any loan -1-

7 that breaches a representation or warranty. But having failed to conduct due diligence, what it does not have, as a matter of law, is a right to bring a claim for fraudulent inducement. Additionally, the Court should dismiss the Second and Fifth Causes of Action as improperly pleaded breach of contract claims; 1 dismiss the Fourth Cause of Action as a duplicative breach of the implied covenant claim; and strike the requests for punitive and consequential damages and the request for a jury trial. II. ARGUMENT A. MBIA s Fraudulent Inducement Claim Should Be Dismissed Because MBIA Cannot Adequately Plead Justifiable Reliance It is clear from both MBIA s complaint and opposition memorandum that MBIA admittedly conducted no independent due diligence of the loan files before agreeing to insure the Transaction. See Compl. 42. This failure means that MBIA cannot adequately plead justifiable reliance: As a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it, such as reviewing the files of the other parties. UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 88, 733 N.Y.S.2d 385, 386 (App. Div. 1st Dep t 2001). 1. MBIA s Failure to Do Any Independent Due Diligence Dooms Its Fraudulent Inducement Claim Although MBIA tries to avoid the consequences of its lack of diligence by asserting that it conducted thorough due diligence... to assess the risk it assumed, MBIA Br. at 1, it is clear that the claimed due diligence was no such thing. MBIA describes its thorough due 1 MBIA s Seventh and Eighth Causes of Action for indemnification and reimbursement are dependent on the Fifth Cause of Action and should be dismissed as well. -2-

8 diligence as follows: MBIA demanded and received Credit Suisse s representations and disclosures regarding the attributes of the securitized loans and its due diligence, the processes and protocols [Credit Suisse] used to issue mortgage-backed securities, and its financial status. MBIA Br. at 12. In other words, MBIA claims that because Credit Suisse told it that the loans met underwriting guidelines, it was relieved of its legal obligation to do anything to independently verify the quality of the loans. Such allegations do not satisfy the justifiable reliance prong of the fraud claim. Instead, to state a valid claim for fraud, a sophisticated plaintiff such as MBIA must have conducted its own independent due diligence. See DDJ Mgmt., 875 N.Y.S.2d at 19 (holding that dismissal was appropriate because plaintiffs had not conduct[ed] an independent appraisal of the risks they [were] assuming ) (emphasis added)); see also Abrahami v. UPC Constr. Co., 224 A.D.2d 231, 234, 638 N.Y.S.2d 11 (App. Div. 1st Dep t 1996) (stating that sophisticated businessmen plaintiffs had a duty to... conduct an independent appraisal of the risk and should have endeavored to conduct an audit, or some form of independent due diligence, of the defendant s financial condition) (emphasis added); Big Apple Consulting USA, Inc. v. Belmont Partners, LLC, 2008 WL , at *3, 873 N.Y.S.2d 232 (Sup. Ct. N.Y. Sept. 15, 2008) ( A sophisticated investor may not allege justifiable reliance upon alleged incomplete disclosure and partial withholding of information where it could independently assess the risks and benefits of the transactions at issue. ) (emphasis added)). 2 MBIA s decision to rely entirely on Credit 2 MBIA s assertion that it could not review the individual loan files because it did not have sufficient time to do so and at the same time meet the proposed transaction-closing date is beside the point. See Compl. 42; MBIA Br. at 12. MBIA s decision to proceed with the transaction with the knowledge that it had not done any independent due diligence is dispositive for purposes of its fraud claim. See KNK Enters., Inc. v. Harriman Enters., Inc., 33 A.D.3d 872, 824 N.Y.S.2d 307 (App. Div. 2d Dep t 2006) (reversing judgment in favor of a fraud plaintiff for lack of justifiable reliance because plaintiff decided to proceed with the transaction, despite knowing that it had not received full information concerning the transaction ). -3-

9 Suisse s representations, rather than doing its own review of even a small portion of the underlying loan files, defeats its claim for fraud. MBIA s argument that its failure to conduct independent due diligence should be excused because all reasonable inferences are that such diligence would not have discovered Credit Suisse s fraud, MBIA Br. at 12, is flatly contradicted by MBIA s own allegations. MBIA admits that it did not review any of the underlying loan files before it agreed to insure the Transaction. See Compl. 23. It now claims, however, to have discovered the alleged fraud by reviewing a small sample of those very same loan files. Id. 11. Thus, accepting MBIA s allegations as true for purposes of this motion only: (i) MBIA was able to discover the basis for its allegations by doing exactly what it could and should have done before entering into the Transaction; and (ii) had MBIA conducted any independent due diligence whatsoever, it would have discovered what it now claims it did not know. 3 New York courts do not permit plaintiffs who have failed to perform even this limited level of investigation to bring fraud claims based on after-the-fact investigations. Zanett Lombardier, Ltd. v. Maslow, 29 A.D.3d 495, 496, 815 N.Y.S.2d 547 (App. Div. 1st Dep t 2006) (plaintiffs could not claim justifiable reliance where ordinary intelligence or reasonable investigation would have revealed alleged fraud). 2. Neither the Presence of Contractual Warranties Nor Plaintiff s Ready Access to Information Disproving Defendant s Representations is Relevant to the Issue of Due Diligence MBIA s response to the above discussion is to argue that it is legally excused from its obligation to conduct independent due diligence because Credit Suisse provided various representations and warranties regarding the quality of the loans. See MBIA Br. at Credit 3 MBIA s citation to Judge Bransten s statement in MBIA v. Countrywide that in that action it is not conclusive that MBIA could have discovered the alleged fraud simply ignores what MBIA has expressly alleged here. See MBIA Br. at 13. In this case, MBIA s own allegations are conclusive that it could and, indeed, would have discovered the alleged fraud had it performed any independent due diligence. -4-

10 Suisse does not dispute that the Pooling & Servicing Agreement contains certain representations and warranties, or that MBIA can state a breach of the Repurchase Protocol claim by alleging that particular loans violated those representations and warranties. But there simply is no support under New York law for the proposition that a representation or warranty of any type will relieve a sophisticated party of its obligation to conduct independent due diligence and then allege fraud. Metropolitan Coal Co. v. Howard, 155 F.2d 780 (1946), cited by MBIA for its definition of a contractual warranty, MBIA Br. at 14, is not to the contrary: that was a breach of contract case, with no allegation of fraud. 4 As discussed above, the law in New York is that a sophisticated party like MBIA must conduct its own independent due diligence. E.g., DDJ Mgmt., 60 A.D.3d 421; Abrahami, 224 A.D.2d 231; Big Apple Consulting USA, Inc., 873 N.Y.S.2d If it wants to rely solely on the contractual representations and warranties made by the other party, then it is limited to its contractual remedies. MBIA cites no contrary authority, and instead attempts to skirt these rules by arguing that a fraud claim should not be dismissed for lack of due diligence unless the plaintiff both (i) had ready access to the information that would have disproved the defendant s representations, and 4 Curran, Cooney, Penney, Inc. v. Young & Koomans, Inc., 183 A.D.2d 742, 743, 583 N.Y.S.2d 478 (App. Div. 2d Dep t 1992), does not hold, as MBIA contends, that justifiable reliance can be satisfied by demanding contractual warranties. MBIA Br. at 14. Although the plaintiff in that case did not obtain a contractual warranty, that fact did not control the court s holding that a sophisticated plaintiff must take advantage of the means available to conduct independent due diligence. MBIA s citation to Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007) similarly is misplaced, and omits a critical fact: that case involved alleged misrepresentations relate[d] to matters peculiarly within the other party s knowledge. Id. at 181. The Second Circuit specifically stated that a different standard applies in such a situation. Id. Because the facts about the pooled loans were not peculiarly within Credit Suisse s knowledge, the standard applied in Merrill Lynch is inapplicable here. 5 MBIA s attempt to distinguish United Guaranty Mortgage Indemnity Co. v. Countrywide Financial Corp., 660 F. Supp. 2d 1163 (C.D. Cal. 2009) ( UGMI ) (App., Ex. J), is unpersuasive. Credit Suisse recognizes, as it states in its opening memorandum, that UGMI involves a mortgage insurer and applies California law. Nevertheless, the decision is consistent with New York law and yet another example of a sophisticated plaintiff being unable to claim fraud after it failed to conduct any independent due diligence. -5-

11 (ii) did not obtain express contractual warranties. See MBIA Br. at This position is without support. Neither a lack of ready access nor the presence of contractual warranties absolves plaintiffs of the duty to do due diligence. In DDJ Management, 60 A.D.3d at 424, the First Department expressly rejected MBIA s position. The court held that the plaintiffs could not justifiably rely on defendant s financial statements alone, but instead were required to do independent due diligence by reviewing the defendant s books and records for themselves. Id. Furthermore, even if there was no... express right [to review books and records], the plaintiffs should have insisted upon doing so before making the loan. Id. The decision makes no mention of, and does not depend upon, the presence or absence of contractual warranties. Id. Other New York cases are in accord. In Abrahami, 224 A.D.2d 231, the court held that the plaintiffs could not justifiably rely on the defendant s financial statements, but instead should have endeavored to conduct an audit, or some form of independent due diligence, with regard to the financial condition of UPC. Id. at 234. The court did not discuss whether plaintiffs had ready ability to conduct an audit, or whether the contract between the parties contained any warranties. See id. Similarly, whether plaintiff had ready access to information or whether the contract included warranties was not discussed in KNK Enterprises, Inc. v. Harriman Enterprises, Inc., 33 A.D.3d 872, 872, in which the court dismissed a fraud claim for lack of justifiable reliance where plaintiff had decided to proceed with the transaction, despite knowing that it had not received full information concerning the transaction. -6-

12 In any event, MBIA s suggestion that it did not have ready access is belied by its allegation that it never bothered to request a single loan file. Compl MBIA thus proceeded here in exactly the fashion disapproved by the KNK Enterprises Court: it chose to participate in the Transaction despite knowing that it had not reviewed a single loan file from among all the pooled loans. Id. MBIA conducted no independent due diligence and failed to verify the accuracy of any of Credit Suisse s own diligence, although its subsequent investigation shows that it could have. 3. MBIA Received Disclosures that Alerted It to the Underwriting Concerns It Now Raises The disclosures made in the Prospectus and ProSupp should have alerted MBIA to the very same concerns it raises here. MBIA s core allegation about the alleged faulty underwriting of the pooled loans is that underwriters disregarded the fundamental principle of mortgage lending (i.e., the assessment of the borrower s ability and willingness to repay). MBIA Br. at 17. Had it read the Prospectus, however, MBIA would have learned that the pooled loans included NINA (no income/no asset) loans, for which a borrower is not required to state his or her income or assets, and, therefore, no verification of such mortgagor s income or assets is undertaken by the originator. Prospectus (Chelney Aff., Ex. E), at 31 (emphasis added). This disclosure makes it entirely clear that for some pooled loans, the originators expressly undertook no assessment of whether borrowers had any ability to repay. 7 6 Thus, this case is distinguishable from Swerskey v. Dreyer & Traub, 219 A.D.2d 321, 643 N.Y.S.2d 33 (App. Div. 1st Dep t 1996), cited by MBIA. MBIA Br. at 13 n.6. 7 Other disclosures should have alerted MBIA to the fact that many of the pooled loans were underwritten based not on the borrowers ability and willingness to repay, but on the value of the mortgaged property. See, e.g., Prospectus (Chelney Aff., Ex. E), at 5 (disclosing that the loans included adjustable rate and other types of mortgages for which the borrower may have qualified for those loans based on an income level sufficient to make the initial payments only ). -7-

13 In any event, Credit Suisse is not arguing, as MBIA suggests, that general disclaimers absolve it of purported specific misrepresentations. See MBIA Br. at 17. Rather, Credit Suisse contends that specific disclosures in the Prospectus and ProSupp indisputably alerted MBIA to the underwriting practices about which it now complains; and that, having decided to proceed with the Transaction in the face of these disclosures and without conducting any independent due diligence, as a matter of law, MBIA cannot adequately plead fraud. 8 See Ittleson v. Lombardi, 193 A.D.2d 374, 376, 596 N.Y.S.2d 817 (App. Div. 1st Dep t 1993) (dismissing fraud claim where plaintiff was on notice that he was purchasing an old building but failed to inquire further or request additional information about the building s condition); Matter of Dean Witter Managed Futures Ltd. P ship, 282 A.D.2d 271, 271 (App. Div. 1st Dep t 2001) ( disclosures in the written offering materials rendered any reliance on alleged contradictory oral representations unjustifiable as a matter of law ). 4. No Fact Issue Precludes Dismissal Because MBIA s Own Allegations Defeat Any Claim of Justifiable Reliance As its ultimate fallback, MBIA unpersuasively argues that the question of whether it conducted due diligence is one of fact that cannot be resolved on a motion to dismiss. Try as it might, MBIA cannot escape the allegations in its Complaint. As noted above and in Defendants opening memorandum, numerous New York courts have dismissed fraud claims on the pleadings where a sophisticated plaintiff failed to conduct any independent due diligence. See, e.g., UST Private Equity Investors Fund, Inc., 288 A.D.2d 87; Elghanian v. Harvey, 249 A.D.2d 206, 671 N.Y.S.2d 266 (App. Div. 1st Dep t 1998). 8 This is not to say that MBIA has no remedy for alleged defects in the pooled loans; rather, it has the contractual remedy of the Repurchase Protocol. And while section 5.02 of the Insurance Agreement may provide that its contractual remedies are not exclusive, this section does not grant a license to bring a fraud claim without establishing its elements, as MBIA now attempts to do. -8-

14 B. MBIA s Fraudulent Inducement and Contract Claims Are Duplicative Credit Suisse submits that the above grounds are sufficient to dismiss MBIA s claim of fraudulent inducement. But this cause of action should be dismissed for the separate reason which MBIA does not dispute that its allegations relating to purported pre-contractual misrepresentations as to the quality of the loans match those made in connection with its breach of warranty claim. 9 Instead, MBIA tries to salvage its fraud claim by arguing that despite this clear overlap, its claim survives because the pre-contractual statements related to then-existing facts. See MBIA Br. at 20. This position is counter to well-established New York law. It is not sufficient that the alleged misrepresentations are about then-present facts; rather, they also must be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract. The Hawthorne Group, LLC v. RRE Ventures, 7 A.D.3d 320, 323, 776 N.Y.S.2d 273, 276 (App. Div. 1st Dep t 2004) (internal citation omitted). As detailed in Credit Suisse s opening brief, MBIA s fraud allegations are identical to the allegations it makes in connection with its breach of warranty claims. See CS Br. at 18. As a matter of law, the fraud claim is duplicative of the contract claims and should therefore be dismissed. Despite MBIA s cursory attempt to distinguish the cases cited in Credit Suisse s opening brief, those cases control. In J.E. Morgan Knitting Mills, Inc. v. Reeves Bros., Inc., 243 A.D.2d 422, 663 N.Y.S.2d 211 (App. Div. 1st Dep t 1997), for example, the plaintiff alleged that the defendants misrepresented whether undisclosed liabilities burdened the property, a fact that was then incorporated into the contract as a warranty. The court dismissed the fraud claim as based on the same facts as underlie the contract claim and is not collateral to the contract. Id. at 423; 9 Credit Suisse disputes that MBIA has adequately alleged pre-contractual misrepresentations, as MBIA does not allege that CS Securities actually knew its statements were false when made. Instead, MBIA relies entirely on its post-loss underwriting review to argue that CS Securities must have known that these statements were false. -9-

15 see Savasta and Co. v. Interactive Planet Software Motion Inc., 2008 WL , at 4, No /2005 (N.Y. Sup. Ct. June 12, 2008) (holding that plaintiff could not base fraud claim on alleged misrepresentations made during pre-contractual negotiations because they f[ell] exactly within the warranties contained within this paragraph and are not extraneous to the Agreement ). As is clear from these cases, New York courts routinely dismiss fraud claims such as MBIA s i.e., where, even if a plaintiff alleges misrepresentations of present fact, those misrepresentations are not extraneous to the agreement. MBIA claims that CS Securities misrepresented material information about each loan of the pooled loans. Compl. 28, 32. This alleged misrepresentation of present fact is not collateral to the contract because representations about the loans were incorporated into the contract and form the basis of one of MBIA s contract claims. See Compl MBIA relies heavily on two recent orders on motions to dismiss in cases brought by MBIA to escape its obligations under other financial guaranty insurance policies. See MBIA Ins. Co., LLC v. Residential Funding Co. LLC, No /2008 (N.Y. Sup. Ct. N.Y. County Dec. 22, 2009) (Fried, J.) ( Residential Funding ) (App., Ex. G); MBIA Ins. Corp. v. Countrywide Home Loans, No /2008 (N.Y. Sup. Ct. N.Y. County Jul. 8, 2009) (Bransten, J.) ( Countrywide ) (App., Ex. F). In both cases, the court denied a motion to dismiss MBIA s claim of fraudulent inducement as duplicative of its contract claims. Respectfully, we believe 10 MBIA argues that there is irony in Credit Suisse s contention that MBIA s fraud claim is duplicative of its contract claims because the fraud claim is alleged against CS Securities, while the contract claims are alleged against DLJ. MBIA Br. at 21. Notably, it does not argue that this fact is dispositive of the issue, because it is not. As Credit Suisse stated in its opening brief, all of the parties involved in this complex transaction, as detailed in the Transaction Documents, agreed to the specific process of the Repurchase Protocol to address breaches of representations and warranties. CS Br. at 18. MBIA s duplicative fraud claim cannot be saved by the fact that DLJ, not CS Securities, is a party to the PSA and Insurance Agreement. -10-

16 these decisions are factually distinguishable, inconsistent with controlling authority, and not binding on this Court. 11 The holding in Residential Funding was based on the rule... that a fraud claim should be dismissed as redundant [of a contract claim] only when the fraud alleged is that the defendant was not sincere when it promised to perform under the contract. (emphasis added). Residential Funding, at 7. As discussed above, however, for a fraud claim to stand, there must be allegations not only that the promise made was insincere, but also that the alleged misrepresentation is both extraneous to the contract and involves a duty separate from the contract. See, e.g., The Hawthorne Group, 7 A.D.3d at 323 (dismissing duplicative fraudulent inducement claim); Canstar v. J.A. Jones Constr. Co., 212 A.D.2d 452, 453, 622 N.Y.S.2d 730 (App. Div. 1st Dep t 1995) (dismissing duplicative fraudulent inducement claim where there was no assertion that plaintiff allegedly breached any obligation collateral to or separate and apart from the obligations it had agreed to perform pursuant to the contract ). The Countrywide Court recognized that [a]lthough warranties generally constitute statements of fact instead of intent, fraudulent-misrepresentation allegations in connection with contractual warranties will be dismissed if no other misrepresentation than the warranty is alleged. Countrywide, at 9. The court nevertheless denied the motion to dismiss MBIA s fraud claim because it relate[d] to representations in connection with entering into the Insurance Agreement, and not simply a breach of its terms. Id. at 10. But a fraud claim should be dismissed if it is based on the same facts as a breach of warranty claim, even if the facts underlying the warranty allegedly were communicated as an inducement to enter into the 11 A decision of one Supreme Court is not binding on another Supreme Court. See, e.g., People v. Ferraro, 541 N.Y.S.2d 324, 327, 143 Misc.2d 482, 486 (Sup. Ct. 1989); Williams v. AGK Commnc ns, Inc., 542 N.Y.S.2d 122, 124, 143 Misc.2d 845, 848 (Sup. Ct. 1989); see N.Y. Statutes Law 72(b) cmt. (McKinney 2009) ( A decision of a court of equal or inferior jurisdiction is not necessarily controlling. ). -11-

17 contract. See, e.g., Varo, Inc. v. Alvis PLC, 261 A.D.2d 262, 265, 691 N.Y.S.2d 51 (App. Div. 1st Dep t 1999) (fraud claim could not survive where the fraud is alleged to have occurred by virtue of the representations made in the environmental warranty ); J.E. Morgan Knitting Mills, 243 A.D.2d 422 (dismissing fraud claim based on claim that defendants knew at the time of contract execution that their warranty therein was false). This precedent requires dismissal of MBIA s fraud claim. 12 C. MBIA s Contract Causes of Action 2 and 5 Are Improperly Pleaded MBIA has failed to adequately plead its Second and Fifth Causes of Action for Breach of Representations and Warranties and Material Breach of the Insurance Agreement. Contrary to MBIA s contention, these breach of contract causes of action cannot be based on generalized allegations that its post-loss sampling of loans (MBIA Br. at 22) revealed pervasive and systematic breaches of representations and warranties. Compl. 69. Instead, MBIA must tie the alleged breaches to individual loans, as it did in its Breach of Repurchase Obligation (Third) Cause of Action. The representations and warranties in the PSA, the pervasive breach of which MBIA argues gives rise to these causes of action (MBIA Br. at 22), are made with respect to each loan included in the Transaction, Compl. 48 (emphasis added), so MBIA cannot adequately plead these causes of action without identifying particular defective loans. 13 Even the transaction-level warranties cited by MBIA depend on a loan-level analysis to determine whether they have been breached. See id. 44 (quoting section 2.01(j) of the 12 As discussed in Defendants opening brief, First Bank of the Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 690 N.Y.S.2d 17 (App. Div. 1st Dep t 1999), appears to be an outlier decision that should be limited to its facts. Defendants submit that the better-reasoned opinions discussed above demonstrate a trend away from the holding in First Bank. 13 Defendants do not move to dismiss the Third Cause of Action, which identifies loan-level breaches as to 1,214 specific loans, 564 of which Defendants allegedly failed to properly repurchase. Defendants do, however, contest the merits of that cause of action. -12-

18 Insurance Agreement, which provides that no material information relating to the Mortgage Loans contains any statement of a material fact that was untrue or misleading in any material adverse respect when made ). These warranties relate to the characteristics of the pooled loans, which can be analyzed as pleaded on a loan-by-loan basis only. MBIA does not dispute that the Seventh and Eighth Causes of Action for indemnification and reimbursement are entirely dependent on the Fifth Cause of Action. Because the Fifth Cause of Action is defective, the Seventh and Eighth Causes of Action should be dismissed as well. D. MBIA s Good Faith and Fair Dealing Claim is Duplicative of Its Contract Claims and Should be Dismissed MBIA fails to address the controlling law dictating that its good faith and fair dealing claim should be dismissed because it is entirely redundant of its contract claims. See, e.g., Rather v. CBS Corp., 68 A.D.3d 49, 886 N.Y.S.2d 121 (App. Div. 1st Dep t 2009) (affirming dismissal of claim that was duplicative of contract claim); Pludeman v. N. Leasing Sys., Inc., 40 A.D.3d 366, 837 N.Y.S.2d 10 (App. Div. 1st Dep t 2007) (same); Levi v. Utica First Ins. Co., 12 A.D.3d 256, 258, 786 N.Y.S.2d 3 (App. Div. 1st Dep t 2004) (dismissing claim because claim is intrinsically tied to the damages allegedly resulting from the breach of the contract ). Instead, MBIA relies primarily on Justice Bransten s decision not to dismiss the good faith and fair dealing claim in Countrywide. While not controlling, Justice Fried in Residential Funding reached the opposite conclusion, and dismissed MBIA s duplicative good faith and fair dealing claim. Residential Funding, at Based on controlling law, MBIA s breach of the implied covenant claim should be dismissed. 14 MBIA attempts to distinguish Residential Funding by arguing that MBIA did not allege the same types of servicing obligations in that case that it does here. This purported distinction is irrelevant. The critical issue is that MBIA makes no allegations in connection with its good faith and fair dealing claim that are not encompassed in its Sixth Cause of Action for breach of access rights and servicing obligations. -13-

19 E. MBIA Is Not Entitled to Punitive and Consequential Damages MBIA does not contest that its prayer for punitive damages must be stricken if this Court dismisses its fraudulent inducement claim. See Rocanova v. Equitable Life Assurance Soc y of U.S., 83 N.Y.2d 603, , 634 N.E.2d 940 (1994). And despite MBIA s assertion in its briefing that Credit Suisse s conduct was willful, MBIA Br. at 24, the cited paragraphs of the Complaint simply allege that Credit Suisse made false representations or acted wrongfully. Compl. 32, 33, 57, 59, Such allegations do not meet the high bar for punitive damages. 15 E.g., Rocanova, 83 N.Y.2d at 613 & 615. Similarly, as a matter of law, MBIA is not entitled to consequential damages, which are unavailable if losses are merely speculative or conjectural. Bi-Economy Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127, 10 N.Y.3d 187, 193, 856 N.Y.S.2d 505 (2008). Moreover, the Insurance Agreement indicates the parties did not foresee damages beyond those set forth therein. See Insurance Agreement (Cheney Aff., Ex. G), 3.04 (setting forth a long list of possible damages, not including lost profits). 16 F. MBIA Is Not Entitled to a Jury Trial MBIA argues that the jury trial waiver in the Insurance Agreement is ineffective because MBIA has asserted a fraudulent inducement claim. See Wells Fargo Bank v. Stargate Films, Inc., 18 A.D.3d 264, 795 N.Y.S.2d 18 (App. Div. 1st Dep t 2005). But the rule cited in Wells 15 Indeed, MBIA cites only two paragraphs of its Complaint paragraphs 32 and 33 that are relevant to the fraud claim, and these paragraphs certainly do not suggest wrongdoing that has circumstances of aggravation or outrage. See Waltree Ltd. v. ING Furman Selz LLC, 97 F. Supp. 2d 464, 470 (S.D.N.Y. 2000). 16 And the nature of the contract between MBIA and Defendants an insurance contract indicates that Defendants did not foresee the availability of consequential damages. See Bi-Economy Mkt., Inc., 10 N.Y.3d at 192 (the nature of an insurance contract is such that the insured bargains for the peace of mind... of knowing that it will be protected in the event of a catastrophe ). MBIA s argument that Defendants reasonably anticipated that they would have to pay for MBIA s lost profits in the event of a catastrophic occurrence runs counter to the nature of insurance contracts. Instead of bargaining for its own peace of mind, Defendants would in effect have been insuring the insurer. -14-

20 Fargo applies only where a plaintiff challeng[es] the validity of the agreement. Id. at 265. In contrast, MBIA seeks contractual damages, rather than rescission, in addition to its claim of fraudulent inducement. It is therefore bound by the jury-trial waiver. See Kimi Jewelers, Inc. v. Advance Burglar Alarm Sys., Inc., 161 A.D.2d 273, 555 N.Y.S.2d 51 (App. Div. 1st Dep t 1990) ( plaintiff should not be permitted to assert claims arising out of the agreement while, at the same time, repudiating the jury waiver clause ); Fay s Drug Co. v. P&C Property Coop., Inc., 51 A.D.2d 887, 380 N.Y.S.2d 398 (App. Div. 4th Dep t 1976) (enforcing jury-trial waiver despite counterclaim for fraudulent inducement because counterclaimant also sought contract damages); Leav v. Weitzner, 268 A.D. 466, 51 N.Y.S.2d 775 (App. Div. 1st Dep t 1944) (stating that plaintiffs asserting fraudulent inducement and contract claims, but not rescission, were bound by jury-trial waiver). III. CONCLUSION For the reasons set forth above, Defendants respectfully request that the Court grant their motion to dismiss. March 26, 2010 ORRICK, HERRINGTON & SUTCLIFFE LLP By: /s/ Stan Chelney Stan Chelney 666 Fifth Avenue New York, NY (212) Attorneys for Defendants Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital, Inc. and Select Portfolio Servicing, Inc. -15-